1. What market characteristics does Monopolistic Competition share with Perfect
ID: 1102906 • Letter: 1
Question
1. What market characteristics does Monopolistic Competition share with Perfect Competition? What characteristics does Monopolistic Competition share with Monopoly?
2. Suppose that a small town has seven burger shops whose respective shares of the local hamburger market are (as a % of all hamburgers sold) 23%, 22%, 18%, 12%, 11%, 8%, and 6%. What is the four-firm concentration ratio of the hamburger industry in this town? What is the Herfindahl Index? If the top three sellers combined into a single business, what would happen to the Herfindahl Index and the Four-firm concentration ratio?
3. How does advertising benefit a society? In what ways can advertising be harmful?
4. Under what conditions will a competitive firm shut down temporarily? Under what conditions will a competitive firm exit the market? Explain.
5. Briefly explain why competitive firms earn zero economic profit in long-run equilibrium.
6. What are the characteristics of a perfectly competitive market? How does a perfectly competitive firm choose their level of production?
Explanation / Answer
Similar characteristics of monopolistic competition and perfect competition.
Both market have large number of sellers and buyers.
There is freedom of entry and exit to the firms.
Break even point occurs when marginal revenue is equal to marginal cost.
Similar characteristics monopolistic competition and monopoly.
Equilibrium quantity is determined where marginal cost of equal to marginal revenue.
Marginal revenue curve is below demand curve
The producer is a price maker.
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